Nykaa Shares: Dolat Capital Maintains ‘Sell’ Rating Despite Healthy Q1 Performance

FSN E-Commerce Ltd., the parent company of Nykaa, reported a healthy Q1 FY26 operating and financial performance, with gross merchandise value, revenues, gross profit, and Ebitda growing by 26%, 23%, 27%, and 46% YoY, respectively. However, despite this impressive growth, Dolat Capital has maintained its ‘Sell’ rating on the stock, citing rich valuations as the biggest red flag.

Rich Valuations: A Major Concern

The report highlights that Nykaa’s valuation is a major concern, with the stock trading at 84x EV/Ebitda and 303x PE (FY26E). This is significantly higher than the industry average, and Dolat Capital believes that the valuation is not justified by the company’s current financial performance. The report also notes that the beauty and personal care margins remain flat, and newer business lines are still in the investment phase, which limits margin expansion.

Challenges in Margin Expansion

Nykaa is facing challenges in managing rapid growth along with margin expansion, as multiple segments are under-investment mode, including fashion, superstore, and GCCs. This has resulted in higher marketing expenses and adjusted profit after tax due to higher tax. The core BPC margins also remain rangebound, restricting the platform effect due to higher marketing costs for customer acquisition and retention, as well as competition.

Growth in Fashion Remains Weak

The report also notes that growth in the fashion segment continues to remain weak, which is a concern for the company. Despite efforts to expand its fashion offerings, Nykaa has not been able to achieve significant growth in this segment, which is a major contributor to the company’s revenue.

Revised Target Price

Dolat Capital has revised its target price for Nykaa to Rs 185 at 4.5x FY27E EV/S, down from its previous target price of Rs 183. The report notes that the valuation remains extremely rich, with the stock trading at ~84/59x FY26/27E EV/E and 303/147x PE.

Investment Advice

While the report provides an analysis of Nykaa’s Q1 performance and valuation, it is essential to note that investment decisions should be made based on individual circumstances and risk tolerance. Investors should consult with a financial advisor before making any investment decisions.

Conclusion

In conclusion, while Nykaa’s Q1 performance was healthy, the rich valuations and challenges in margin expansion are major concerns. Dolat Capital’s ‘Sell’ rating on the stock is a reflection of these concerns, and investors should exercise caution before investing in the stock. As the Indian stock market continues to evolve, it is essential to stay informed about the latest developments and trends to make informed investment decisions.

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